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Regulation (EU) 2023/956 establishes CBAM, the world's first carbon border measure: importers of covered goods must buy certificates priced at the weekly EU ETS auction average. Not a tax, a regulatory carbon-pricing obligation designed to prevent carbon leakage and complement the EU Emissions Trading System.
What CBAM is, what it is not, and why it exists
CBAM is a regulatory carbon-pricing obligation. Importers buy CBAM certificates whose price tracks the weekly average EU ETS allowance auction price, reflecting the embedded emissions in the goods they import. The obligation to purchase certificates is a regulatory instrument, not a tax, making it compatible with World Trade Organization rules (Recital 15). It imposes no quantitative limits on imports (Recital 21).
Prevent carbon leakage. As the EU strengthens its carbon price under the EU ETS, producers in countries without equivalent carbon pricing gain a competitive advantage. Without CBAM, they could undercut EU producers on price, or production (and its emissions) could simply relocate outside the EU, achieving no net climate benefit. CBAM closes that gap on the import side.
Complement the EU ETS. EU producers pay for the carbon cost of their emissions via EU ETS allowances. CBAM ensures imported goods face an equivalent cost, creating a level playing field between domestic and foreign production.
Encourage third-country climate action. By making carbon-intensive exports to the EU more expensive, CBAM creates an incentive for trading partners to adopt carbon pricing. Carbon prices paid in the country of origin count as a credit against CBAM obligations (Art 9).
As a Regulation, CBAM applies directly without national transposition. However, it is administered jointly: the Commission runs the central CBAM registry, the certificate platform, and the weekly price mechanism. Member State competent authorities authorise declarants, sell certificates, and enforce penalties. Customs authorities police the border.
Annex I of Regulation (EU) 2023/956, defined by Combined Nomenclature (CN) codes
CO2 is measured for all six sectors. Nitrous oxide (N2O) is additionally counted for fertilisers and nitric acid, since ammonia-based fertiliser production generates significant N2O emissions. Perfluorocarbons (PFCs) are additionally counted for aluminium, arising from the aluminium smelting process.
Direct vs indirect emissions: Annex II lists sectors where only direct emissions count in the initial phase (iron and steel, aluminium, certain hydrogen). Cement, fertilisers, and electricity count both direct and indirect (electricity-related) emissions, reflecting the symmetric treatment EU producers receive.
Organic chemicals and refinery products were deliberately excluded at adoption (Recitals 34-35) because their embedded emissions could not yet be unambiguously allocated to individual products. Goods with a value of 150 euros or less, goods in travellers' personal luggage, goods for military use, and goods from the Annex III exempt countries/territories are also excluded.
Exempt countries and territories (Annex III): Iceland, Liechtenstein, Norway, Switzerland (EEA/linked ETS partners) plus the special territories Büsingen, Heligoland, Livigno, Ceuta, and Melilla.
Transitional reporting period followed by the full financial regime
The Commission must review CBAM and report by 2025 on expanding its scope to all EU ETS sectors and to downstream goods by 2030. A live amendment is already in progress: the downstream-goods scope extension and anti-circumvention package (COM(2025) 989, procedure 2025/0419(COD)) proposes extending CBAM to processed steel and aluminium products to close circumvention pathways.
The authorised CBAM declarant lifecycle, step by step (definitive regime from 1 January 2026)
The key figures from Regulation (EU) 2023/956 at a glance
| Metric | Value | Source |
|---|---|---|
| Covered sectors | 6 (cement, electricity, fertilisers, iron and steel, aluminium, hydrogen) | Annex I |
| Articles | 36 | Structure |
| Recitals | 116 | Preamble |
| Chapters | 11 | Structure |
| Annexes | 6 (I-VI) | Structure |
| Definitions | 34 (Art 3) | Art 3 |
| Certificate = 1 unit of | 1 tonne CO2e of embedded emissions | Art 3 |
| Certificate price basis | Weekly average EU ETS auction closing price | Art 21 |
| Quarterly holding threshold | 80% of year-to-date embedded emissions (default-value basis) | Art 22(2) |
| Repurchase cap | 1/3 of certificates purchased in the prior year | Art 23 |
| Annual surrender deadline | 31 May each year (first: 31 May 2027 for year 2026) | Art 22(1) |
| Certificate cancellation | 1 July each year, for any certificates older than the previous calendar year | Art 24 |
| Penalty for non-declarant importer | 3-5x the EU ETS excess-emissions penalty | Art 26 |
| Exempt countries (Annex III) | 4 countries (Iceland, Liechtenstein, Norway, Switzerland) + 5 territories | Annex III |
| Scope expansion target | All EU ETS sectors by 2030 | Art 30 |
| Legal basis | Article 192(1) TFEU (environment) | Preamble |
Four core concepts underpinning CBAM, as defined in Article 3
An electronic certificate representing one tonne of CO2 equivalent of embedded emissions. Certificates are not tradeable between operators: they can be bought from the Member State platform at the weekly EU ETS auction average, held against the quarterly 80% threshold, surrendered by 31 May each year, or sold back (capped). Certificates older than the previous calendar year are cancelled on 1 July.
The greenhouse gas emissions released during the production of goods covered by CBAM. For simple goods, embedded emissions are determined from the production process. For complex goods (which use covered goods as inputs), the embedded emissions of the precursor inputs are also counted. Default values apply where operators cannot provide verified actual-data figures.
An importer (or its indirect customs representative) holding formal authorised status granted by the competent authority of the Member State of establishment. Only authorised declarants may release covered goods into free circulation in the EU from 1 January 2026. The status is EU-wide and conditional on a clean customs and tax record, an EORI number, financial and operational capacity, and a guarantee for newer entities.
The risk that, as the EU raises its domestic carbon price, production of carbon-intensive goods relocates to countries with lower or no carbon pricing, or that EU goods are displaced by higher-emission imports. This relocation would produce no net global climate benefit while undermining EU industrial competitiveness. CBAM is the legislative response: it extends an equivalent carbon price to the import side, closing the gap that would otherwise incentivise relocation.
Two instruments, one carbon price: the key design differences
| Feature | EU ETS (Dir 2003/87/EC) | CBAM (Reg 2023/956) |
|---|---|---|
| Who it covers | EU installations producing in EU sectors | Importers of covered goods from third countries |
| Instrument type | Cap-and-trade allowance system | Certificate obligation (no cap on imports) |
| Unit | EU allowance (EUA) = 1 tonne CO2e | CBAM certificate = 1 tonne CO2e |
| Price basis | Daily EU ETS auction price (supply/demand) | Weekly average EU ETS auction closing price |
| Trading between operators | Yes: allowances are freely tradeable | No: certificates are non-tradeable; buy-hold-surrender only |
| Free allocation | Phasing out 2026-2034 (Art 10a, Dir 2003/87/EC) | Phases in as ETS free allocation phases out (Art 31) |
| Verification regime | Installation-level EU MRV (Reg (EU) 601/2012) | Declarant-level; verifier accredited under Implementing Reg 2018/2067 |
| Carbon-price credit for abroad | N/A (EU installations only) | Yes: Art 9 reduction for carbon price paid in country of origin |
| Penalty | Art 16(3)/(4) Dir 2003/87/EC excess-emissions penalty | Mirror ETS penalty; 3-5x for non-declarant importer (Art 26) |
CBAM's position in the EU climate and customs legislative architecture
Key terms as used in Regulation (EU) 2023/956 and the CBAM implementing rules
From proposal to full scope: the key milestones of CBAM
Primary sources for Regulation (EU) 2023/956
Full text of Regulation (EU) 2023/956 of 10 May 2023 (36 articles, 116 recitals, 6 annexes):
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32023R0956
CELEX number: 32023R0956 | OJ reference: OJ L 130/52 of 16 May 2023
The Commission's official CBAM information portal, with guidance, FAQs, the CBAM transitional registry, and links to implementing regulations:
https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
Commission Implementing Regulation laying down the transitional-period rules, quarterly reporting forms, and default values:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32023R1773
Commission proposal COM(2025) 989 to extend CBAM to downstream processed steel and aluminium goods and add anti-circumvention provisions. Procedure 2025/0419(COD) under ordinary legislative procedure:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2025:989:FIN
Six tools to analyse, track, and work with CBAM and EU climate legislation